Russia’s Central Bank Wants You to Believe; Governor Elvira Nabiullina has introduced her own version of forward guidance. The results are mixed.
(Bloomberg – bloomberg.com – Anna Andrianova – November 29, 2016)
When central bankers start making predictions about what they’re going to do in the future, reality often has other plans.
Just ask Bank of England Governor Mark Carney, or Federal Reserve Chair Janet Yellen. Recent attempts at so-called “forward guidance” — telling the public how interest rates will evolve in the future — have arguably caused more confusion than clarity when shifts in the economy forced officials to change their plans.
That hasn’t deterred Bank of Russia Governor Elvira Nabiullina from launching her own version of forward guidance this year. And, it’s even working. Sort of.
After the bank issued an unprecedented pledge in September that it would not cut rates further for the remainder of 2016 even amid a weak economy, professional economists promptly lowered their forecasts of inflation closer to the official target of 4 percent.
Economists now forecast annual inflation to be at 4.6 percent by the end of next year, according to a Bloomberg survey. That’s down from an estimate for 5.2 percent inflation in an August survey but still implies they’ll miss their own target. After two years of recession, the economy is seen returning timid growth next year.
Central bank officials are confident about the impact of their pledge.
“The reaction to our September forward guidance matched our expectations,” First Deputy Governor Ksenia Yudaeva said in e-mailed comments. “Overall, the downward trend of inflation expectations is linked to a decline of actual inflation as well as to an increase in market confidence in us reaching the 4 percent inflation goal by the end of 2017.”
Still, abrupt movements in the oil price — Russia’s most important export — could thwart Nabiullina’s intentions. And the bank has confounded everyone before, like when it unexpectedly cut rates in 2015 just six weeks after raising them.
The central bank overshot its inflation forecast in 2015 for the fourth straight year. It sees annual inflation easing to about 5.5 percent by the end of this year from the current rate of just over 6 percent.
And as Russians have an inflation rate of close to 17 percent in recent memory, convincing the man on the street that low and stable inflation is on the way is proving harder than convincing the markets.
“Forward guidance is a two-edged sword, especially for emerging markets,” said Wolf-Fabian Hungerland, an economist at Berenberg Bank in Hamburg, Germany. “With the recent pledge, the Bank of Russia may already be going too far out on a limb, in our view. We expect the central bank not to harden its course, rather the opposite. If there is a reason why the central bank was so successful over the last years, it was because it has proven flexible in its means.”
— With assistance from Andre Tartar
Article ©2016 Bloomberg L.P. All Rights Reserved. Article also appeared at bloomberg.com/news/articles/2016-11-29/russia-s-central-bank-wants-you-to-believe
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